The first step in getting ready for April 15 is to take stock of any life events that happened last year that could affect your return. That means thinking beyond the obvious, such as getting married or having a child, advises Mark Steber, chief tax officer at Jackson Hewitt Tax Service. Bringing in much less income because of a layoff, doing contract work on the side, starting to care for an elderly parent, or living through a natural disaster such as Superstorm Sandy ? all of this can qualify you for deductions you didn?t take in previous years.
Then comes the hard part ? understanding what?s changed in the tax code that may affect you. Legislators tinker constantly with tax law: The IRS reports that, on average, more than one new provision is added to the code every day (adding up to approximately 4,680 since 2001). And the fiscal cliff deal signed January 3 added dozens more rules.
To minimize what you pay the government, it?s critical to understand which provisions have been revised since you last filed (it?s why many people hire professional tax preparers). Here are nine changes affecting individual filers in the 2012 tax year.
1. The AMT fix: The alternative minimum tax requires those people earning above a certain income to pay a minimum tax rate. The fiscal cliff deal that became law on January 3 created an inflation adjustment for the AMT retroactive to last year. You won?t be affected if your 2012 income is $50,600 or less for unmarried taxpayers, $78,750 for joint filers, and $39,375 for married persons filing separately. And the fix means that if you aren?t hit by the AMT this year, you won?t be in the future if your income rises no faster than inflation.
2. Stricter scrutiny of charitable deductions: A tax court decision last May reinforces the importance of getting a correctly worded statement from the nonprofits you donate to about the value of any goods or services you received in exchange ? and if you received nothing in return (which is often the case), the statement needs to say that. The court ruled against one taxpayer whose written declaration from the charity did not contain language about the value of goods and services received in return, says Jeanette Dugas, a partner at tax accounting firm Dugas & Dugas in Winter Haven, Florida. After the IRS disallowed the deduction, the donor got a corrected statement, but the court ruled it was too late. ?The IRS will not allow the correction of such receipts after the return is filed,? says Dugas .
3. More reporting of foreign assets: If you think you can escape U.S. taxes by investing in assets abroad, reconsider. Previously, taxpayers had to report to the IRS any foreign bank accounts in which they held more than $10,000 at any time during the year. New in 2012 is that stricter reporting of other assets is required ? think foreign stocks, bonds, gold, and the like ? on new IRS form 8938, says Steber. Those who don?t comply are taking a big risk: The penalty for not filing can reach $10,000. And the U.S. is working closely with several governments, including France, Germany, and even previously secretive Switzerland, to cross-report on assets.
4. No more estimating stock value: Individual taxpayers can no longer use estimates to report the cost basis for a stock, says Dugas. ?If records are not available, then the IRS will treat the stock as having zero basis and all of the proceeds from the sale will be taxable,? she says. Let?s say you bought 10 shares of a stock at $250 ($2,500 total) and sold them at $275 ($2,750 total). You?ll pay capital gains tax on your $250 profit. But if you don?t have records, the IRS will assume that your purchase price was $0 and your profit was $2,750 ? so? you?ll be taxed on the $2,750 instead. Ouch.
No positions in stocks mentioned.
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